Stocks wobble but no sign of panic as yields surge

• S&P 500 earnings are expected to grow 53% year-over-year in Q2 2026 (49.5% excluding energy), with profits projected to jump 35% for the full year, driven heavily by AI boom in cloud computing at companies like Alphabet and Amazon
• The positive correlation between stocks and bonds that emerged post-pandemic has diminished bonds' traditional safe-haven appeal, leading investors to increase equity allocations and support higher stock valuations
• Small-cap Russell 2000 index has sharply outperformed the S&P 500 in 2026 despite higher rate sensitivity, benefiting from domestic growth trends including reshoring, M&A activity, and deregulation, though it has pulled back 5% from mid-August highs

Market Summary: U.S. Stocks Resilient Amid Bond Yield Surge

Key Market Performance

U.S. equities are demonstrating notable resilience despite a summer bond-market rout, with the S&P 500 sitting just under 3% below its August 13 record high. The 10-year Treasury yield has touched 5%—a level last seen in October 2023—yet stocks have largely weathered the pressure.

Supporting Factors

AI-Driven Growth: Tech giants Apple and Microsoft are trading near record highs as the AI boom continues. The PHLX semiconductor index has surged nearly 60% in 2026 on strong AI demand, though chip stocks have experienced recent volatility.

Strong Earnings: S&P 500 second-quarter earnings are expected to grow 53% year-over-year (49.5% excluding energy). Full-year 2026 profits are projected to jump 35%, up from 14% growth in 2025. Alphabet and Amazon reported robust cloud computing growth driven by AI adoption.

Economic Resilience: Despite price pressures from the Iran war, the U.S. economy remains solid. August job growth accelerated, particularly in leisure and hospitality. Consumer spending was revised upward to 3.4% from 3.2%, supporting two-thirds of economic activity.

Small-Cap Outperformance: The Russell 2000 has sharply outperformed the S&P 500 this year, benefiting from domestic growth, deregulation, and M&A activity, though higher yields recently pressured the index down 5% from its mid-August high.

Market Dynamics

The traditional stock-bond correlation has shifted positive post-pandemic, diminishing bonds' appeal as a safe haven. This has driven increased equity allocations and supported higher valuations. Analysts note investors are buying dips, with expectations that earnings growth remains the key pillar supporting equities despite rising yields and oil prices.